Whole life insurance

Whole life insurance covers you until you die. The premiumsAn insurance premium, or premium, is an amount that a person or company must pay on a regular basis to keep their insurance in effect. For example, if Mary has to pay $200 per year to keep her life insurance in effect, then the premium is $200.
The insurance premium should not be confused with the face amount, or insured amount, which is the amount that the insurance company has to pay out. In the same example, if Mary has life insurance that pays $100,000 to Peter upon her death, then the face amount is $100,000.  are usually guaranteed and fixed (level). Whole life insurance usually provides a cash surrender value. Term 100 life insurance is one exception to this rule and is consequently sometimes classified as term insurance.

Whole life insurance can offer considerable flexibility in premium payments. For example, some contracts may require payments to be made during a fixed period rather than over your entire lifetime.

Properly assess your needs

Whole life insurance premiums are higher than term life insurance premiums in the initial years of the policy. However, term life insurance premiums typically increase at renewal and ultimately end up costing more than permanent life insurance premiums. Therefore, you should determine if you’ll need insurance for a limited period of time or for your entire lifetime.

Examples of needs associated with term insurance

When you die, you want to:

• maintain the standard of living of a family member (spouse or child) for a few years
• pay for your children’s education
• pay off personal debts
• pay off joint debts

Examples of needs associated with permanent insurance

When you die, you want to:

• maximize the value of your estate
• pay your funeral expenses if you think you won’t have sufficient savings to cover them
• pay off taxes on non-liquid assets such as a family business when you die

Participating whole life insurance (participating insurance) includes an investment component. Unlike with universal life insurance, you don’t manage this component yourself; the insurer does it for you.

Because it has an investment portion, participating insurance is usually more expensive than non-participating insurance. It is therefore generally intended for an affluent clientele.

The premiumsA premium, or insurance premium, is an amount that a person or company must pay on a regular basis to keep their insurance in effect. For example, if Mary has to pay $200 per year to keep her life insurance in effect, then the premium is $200.
The premium should not be confused with the face amount, or insured amount, which is the amount that the insurance company has to pay out. In the same example, if Mary has life insurance that pays $100,000 to Peter upon her death, then the face amount is $100,000.  for participating insurance are fixed for the length of time you are required to pay premiums under the contract. The basic insurance amount is generally guaranteed and a cash surrender value may also be included.

If you want to pay as little as possible for insurance, you may find another type of insurance more affordable. Also, to cover only basic needs, you could purchase another, less expensive type of insurance. A representative can help you choose the type of insurance that’s right for you.

• Use the dividends to purchase paid-up insurancePaid-up insurance is insurance for which premiums no longer have to be paid by you. You can pay it up in one shot with a single premium or in just a few years., which will increase your current amount of insurance. Paid-up insurance is often referred to as a “paid-up addition,” or “PUA.”

  This is the main advantage of owning participating insurance. The new insurance is added to your basic insurance policy. It may, in turn, offer dividends and have a guaranteed cash value. As a result, the amount of insurance, dividends and cash surrender value may grow over the years. However, you should ask yourself whether your need for insurance will become greater over time.

• Receive the dividends in cash. Be careful: You may have to pay income tax if you choose this option. Check with your representative beforehand.
• Let the dividend amounts accumulate with a certain return#1. The accumulated amounts will be added to the death benefit. 
• Use the dividends to reduce the premium or fees you pay.
• Use the dividends to purchase one-year term life insurance. This life insurance will be added to your existing insurance and will cover you for one year only.

Example

Élise has just completed her annual financial planning, and she expects to have some surplus cash available each year. She uses $5,500 of that surplus to take out an initial $250,000 participating life insurance policy. She would like to leave the $250,000 as an inheritance. Upon her death, her estate will receive at least $250,000 and possibly more, depending on the dividends she may receive over the years.

In the above example:

• The premium ($5,500) replaces a recurring investment.
• The $250,000 of insurance replaces the value that would have been accumulated in an investment.
• The dividends paid on a periodic basis can increase the death benefit that will be paid.

How participating insurance works

The insurer generally pools the premiums from several participating life insurance policyholders in a fund. The insurer manages the fund by, among other things, investing the pooled amounts and paying the pooled policies’ expenses. Those expenses include:

• Fees for issuing policies
• Fees for managing the policies
• Fees for investing the amounts
• Death benefits
• Cash surrender values of insureds who cancel their insurance

When the fund accumulates a surplus over time, the insurer may withhold part of it, pay part of it to the insureds in the form of dividends and let the remainder accumulate in the fund.

If there is a surplus, the insurer may decide to spread it out over several years. In other words, when the insurer has a large surplus one year, it may keep part of it in the fund in order to pay the money out in leaner years.

Insurers use scenarios to show you what the amount of insurance and cash surrender value of your contract will potentially look like over time. Usually, you will receive a realistic scenario and an adverse scenario.

Feel free to ask your representative for new scenarios. If, for example, you purchased this type of insurance when interest rates were higher, future dividends could be lower than expected, with the insurer obtaining lower returns, particularly on amounts invested in debt securitiesA debt security is a security representing a loan or debt.
Bonds and debentures, which are loans granted by investors to a company, are examples of debt securities. .

Before choosing this type of insurance, contact your representative to find out about the insurer’s dividend payment history. Also ask your representative to compare this product with other life insurance products, such as whole life insurance and term 100 (T100) life insurance, in terms of cost, amount of insurance and cash surrender value. Assuming a realistic scenario, such a comparison would enable you to determine how long it would take for participating insurance to become more advantageous than other types of insurance. You could then choose the insurance product that best suits your needs.

• Remember that this insurance is intended for an affluent clientele.
• Follow these five steps before taking out insurance.
• Consider other investment options. For example, check whether you would be better off taking out another, less expensive type of insurance and contributing the savings to your TFSA, RRSP, RESP or pension plan.
• Assess alternatives based on your budget and financial needs (e.g., term life insurance, non-participating whole life insurance and universal life insurance).